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Electronic Banking Services

Objectives

After studying this chapter you should be able to understand:

5.1 Introduction into e banking services

5.2 Concepts definition regarding e-banking

5.2.1 Development of electronic money in the Euro area;

electronic money oversight, supervision and the Communityregulatory framework

5.2.2 Services of e banking in Romania

5.3 The legal framework in the e-services field

5.3.1 The EU s on-line Financial Services legal framework

5.3.2 The E regulating provisions in Romania

5.4 The risk management for e-banking activities and e-money

5.4.1 Risk identification and risks analysis

5.5 Advantages and disadvantages of Internet banking

ELECTRONIC

BANKING

SERVICES


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5.1Introduction into e banking services

The evolution into the Internet and electronic banking era is set to be the

most fundamental transformation that the industry would have ever had toundergo. Yet, when we arrive on the other side we should not envisagebeing greeted by an era dictated by geeks and impersonal switches, but bythe level of human interaction and use of information that kept eluding usall through the industrial revolution.

Starting the 80s, analysts1 of financial transactions stated that Electronic

Banking services for physical persons will become a common way ofeffecting from home the banking transactions. In the same period, banks

from all over the world invested in developing software solutions,equipment like servers, modems and the development of informationdepartments.

Electronic Banking is a service provided by many of the largest banks to

enable the ordinary customer to transfer funds from one person to another

and to remit funds to a named beneficiary.

This kind of service was firstly accepted by the small savings bank in theUnited States of America, where in a small town the customers are wellknown and the relationships between the banking clerks and the customersare close and stable. In this environment, the operations solicited by phonehave appeared.

The sphere of asked services was also restricted and the bank initiallyagreed to pay only some usual phone bills, with small values. The bank by

phone was called like this due to the fact that the operations were solicitedbased on human voice, by telephone.

1Source: Piaa Financiar magazine, November, 2000


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The communication in both ways raised some problems regarding:

- The presentation and identification of the account holder that solicitsaccess to the banking services and the possibilities of fraud;

- The ways of communicating the information, especially the receiving bythe computer and the coherent answer to be given.

The identification possibilities were varied, but it should be mentioned afew:

- The phone tone, with the help of an emitting pill included in thecustomer s phone;

-

The password;- The personal identification number (PIN).

For an increased safety, some banks have installed a small card reader at thecustomer location.

A computer having the following characteristics facilitated the

communication possibilities:- It asks and answers to the customer, partially based on pre-recorded

messages;

- It recognises the human voice (the words yes and no, the figures,some key words, etc.).

So, based on some precise orders and some key words, the computer mayreceive the customers orders and may give some significant answers tohim.


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The diversity of the solutions adopted by bank to solve these problems and

facilitate the communications is shown in the following table:

The offer LloydsBank of

ScotlandTSB

Nation-

wide

England

BS Royal

Bank of

Scotland

The type

Automaticanswer

(humanvoice)through a

phone and aspecialterminal

Automatic

teletextthrough thephone(keypad,homecomputer)

Automaticanswer

(humanvoice)through the

phone andusing arecognitiontone

Automaticanswer

(humanvoice)through the

phone andusing arecognitiontone

The access

to thesystem

PIN using aspecial card

Password andaccount

numberPassword andspecial PIN

Special PIN

and accountnumber

Password

Special PIN

Costs(besidesthe phonecircuit)

Fixed tariffsareestablishedmonthlyaccording toits use

Fixedmonthly andadditionaltariffsaccording toits use

Quarterlysubscriptionof L2.50 foreach account

Free

Source: Basno C., Dardac N.- Moneda. Credit. Banci, Ed. Didactic iPedagogica RA, Bucureti. 1999

The table shows that many banks use video equipment in order to give thecustomer access to a larger range of services.


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Technological characteristics

The Videotext systemis based on video, a telecommunication procedure thatenables the visualisation of alphanumerical images on a screen.

The Videotext system is a video system with telephone transmission, henceit is a videography where the transmission is done through atelecommunication network (the phone line).

There are three entities that take part in this system: the user, thetransmission network and the service performer (that is a database and a

processor of information in the same time).

The user will be equipped with a terminal and a phone line. He will beconnected to the network through a phone call, after he was identified andrecognised (through the above-mentioned procedures).

The transmission network initially implies the phone contact through thetelephone and after the identification it enables the connection with the

performer through the video access point (WAP).

The functional characteristics of the Videotext System

The system has several functional characteristics that reveal its superior

qualities:

- It ensures the fast transmission of information;

-

It allows a continuous updating of data;- It has an unlimited stocking capacity, so all the specific elements may be

included in the database;

- It has a permanent availability. Hence, it may be accessed from differentplaces and without any time restrictions;

- The system presents a specific accessibility through:

- The use of a communication mean, a simplified language;

- The easy orientation in the system, within a tree structure;

- The multi-criteria access, that enables the information to be selectedbased on more criteria and hence the use of the same information onmore objectives (a simple example is that the operations recorded in anaccount may be structured as credit operations, debit operations, balancesat different dates, etc.)

- The system implies the interaction between two parts.


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The Techniques of the Banking Operations Performed through the Videotext

System

The payment from distance

The payment from distance is possible only when the bank gives the holderof the payment card a purchase power. In this case, the memory of the cardrecords this ability that may be interpreted as a credit limit.

Under the above-mentioned circumstances, the holder of the payment cardconnects through the Videotext system with the seller. The operations are

performed in the following order:

1.The order regarding the goods or services solicited is given;

2.The decision to pay is expressed;

3.The PIN is typed (this operation is juridical equivalent to signing acheque);

4.The amount is typed (this operation is equivalent to filling this mentionon the cheque).

Consequently, the operation is recorded simultaneously in the memory ofthe payment card and in the performer.

In order to finalise the operation in the seller account; the performerperiodically asks the bank for payment. The bank validates the operationand covers the amount by debiting the holder s account.

On the other hand, the payment card keeps in its memory all data regarding

the payments made (the day, the amount, and the beneficiary). So, we may

say that this memory acts as an archive. The credit limitmay be renewedmonthly.

The Teletransfer

The holder of the payment card may use this system to make payments onbehalf of some natural or legal persons. These operations are recorded in thecard memory, but do not affect the purchasing power. Consequently, thisoperation does not have the same execution guarantee, meaning that it may

be performed only if the holder has enough money in his account.


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If not, the bank notifies the holder that the operation is not possible.

Usually, this operation is used for the treasury management of the holder.

He operates for the transfer of funds to special accounts: savings accounts,

term deposits, etc.

Payments regarding electronic bills

The user of the Videotext System establishes with the bank a regime ofautomatic payments for the bills that have specific payment terms (usuallythe monthly bills).Based on these agreements, the payments are automatically made at theestablished dates. The user has the right to cheque if the payments to bemade are right. When he thinks he is entitled he may cancel the payment byaddressing a special order to the bank, also by using the Videotext system.

The teleconsultancy

This denomination refers to the dialogue between the holder of the paymentcard and the bank. It concerns the situation of the holder s account and isdone through the system.

The most frequent questions refer to:- the balance of the account at the bank or the balance of the purchasing

power (the credit);- the last operations recorded in the account;- the interest amounts to be received or paid.

The request of a cheque card

The cheques are used on a large scale, sometimes in parallel with the creditcard. Th request for a new cheque card usually requires the holder to go tothe bank.But the user of the Videotext system has the advantage to request this bymeans of a Videotext message. The operation is quite simple. The bank willhonour the customer request and will mail him a new cheque card.

The local consultancy

The local consultancy is a very natural and sometimes useful service. Itconsists of reading of the credit card memory.


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The expenses ordered according to their succession, the suppliers etc. willappear on the screen and they may be retained. This ensures theclarifications asked by the holder.

The offer of e-banking services of the well known types- m-banking, ITVand PC based on Internet - will permit the bank, in the first place to attractsophisticated clients, that are using many platforms for effectingtransactions, managing, in the same time to access a larger base of potentialcustomers.

ITV-Banking represents a channel that implies small costs; in the sametime, data confidentiality during transactions effected using theinfrastructure of cable TV is reduced.

M-Banking offers the clients the possibility to effect transactionseverywhere in the world and at any time; the size of the phone terminal, aswell as the fact that the mobile phone is a personal object gives maximumconfidentiality assurance to this e-banking service.

M-banking services2will attract an increasing number of active users on thenear future and the volume of the transactions for m-banking users will be

bigger than the volume of transactions through ITV and even through PC-based e-banking.

Nowadays, the PC-based Internet Banking users represent the mostimportant category of e-banking users, the situation will change; a bankshould develop strategies for new banking services offered on a different

platform, by adding a new presentation form in a shorter period of time andat small costs.

5.2 Conceptsdefinition regarding e-banking

The Banking Supervision Committee from Basle defines the e-bankingactivityas the retail banking services and products distribution of differentvalues through electronic channels.

2Source: E-Finance, supplement of Piaa Financiar magazine, December, 2000


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These banking products and services can include: attracting bankingdeposits, granting loans, the accounting management, as well as providingother products and services for electronic payment as e-money.

Usually, the more accessible procedures by which it is possible to distributeto the consumers e-banking products and services are: POs (point of saleterminal), ATMs (automatic teller machine), mobile phones, personalcomputers, distance terminal, Video Kiosk, Internet, and others. Throughthe Internet, a person can have access 24 hours a day/ 7 days per week toher/his accounts and can make transactions, for this operation needing onlya PC connected to the Internet and a browser. The Internet banking servicescan be accessed also through the mobile telephone and with the help ofWAP. This way, because of its rapid extension, the Internet brings newopportunities to the banking industry.

The Internet Banking number of users3 is increasing. In Europe, from

2.8 million users in 1999, Forester Research estimates that the number willreach the value of 10 million by the year 2002. In the United States ofAmerica, the Internet home country, from 7 million Internet Banking usersin 1999, it is estimated that in 2002, there will be 24.2 million.

From the banks point of view, clients segments to which these servicesaddress are: individual clients market(it is estimated that till the end of the

year 2003, there will exist in the United States of America about18.5 million home users); institutional clients market(corporate clients).

It is estimated that by the end of 2003, there will be over 18.5 millionInternet banking home users, in the USA. These clients segment will

probably represent 30% of banks retail activity profits. It is estimated thatInternet banking will be the leader of the Home Banking American market.

Electronic money is a payment instrument whereby monetary value iselectronically stored on a technical device in the possession of a customer.The amount of stored monetary value is decreased or increased, asappropriate, whenever the owner of the device uses it to make a purchase,sale, loading or unloading transaction.

3According to E-Finance, supplement of Piaa Financiar magazine, March, 2001


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A distinguishing feature of transactions carried out with electronic money isthat they do not necessarily involve a bank account. This is a fundamentaldifference between electronic money and access products. With access

products, such as debit cards, payments are settled by means of transfers

between bank accounts.

Electronic moneyrepresent deposited money through electronic means with

the scope of making payments via POs terminal, direct transfers, or through

computers network, like the Internet. The product of stored value includes

hardware or mechanisms based on card (the so called electronic

wallets) and software or mechanisms based on the network (named

digital cash). The stored value cards can have only one destination

(single purpose), like the phone card, and can be used for buying one

single type of merchandise or service from one single vendor; cards with

more destinations (multi-purpose) which can be used for more buyingfrom more vendors.

The banks can participate in the electronic money circuit in the quality of

issuer, but can fulfil also other functions like: distribution of electronic

money issued by other entities, processing and transaction discount made

with the help of electronic money, as well as the registration in accounting

of the corresponding transactions.

According to the Report on electronic money published by ECB in August1998, Electronic money is broadly defined as an electronic store ofmonetary value on a technical device that may be widely used for making

payments to undertakings other than the issuer without necessarilyinvolving bank accounts in the transaction, but acting as a prepaid bearerinstrument4.

A legal definition of electronic money has recently been provided in Article1 of the European Parliament and Council Directive 2000/46/EC on thetaking-up, pursuit and prudential supervision of the business of electronic

money institutions. According to this definition, electronic money shallmean monetary value as represented by a claim on the issuer which is:

(i) stored on an electronic device;

(ii) issued on receipt of funds of an amount not less in value than themonetary value issued;

4ECB Monthly Bulletin November 2000.


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(iii) accepted as mean of payment by undertakings other than the issuer.

The legal definition set out in Directive 2000/46/EC introduces the conceptof a claim on the electronic money issuer. This clarifies the concept of the

issuer, i.e. the undertaking that has ultimate financial responsibility towardsthe holders of electronic money. This distinction is necessary because insome electronic schemes the tasks of issuing and administering electronicmoney are the responsibility of different entities.

Technological features

On a technological level, electronic money products can be further dividedinto hardware-based and software-based products, depending upon thestorage device. In the case of hardware-based product, purchasing power

resides in a device containing hardware-based security features (generally achip, which is usually embedded in a plastic card). By contrast, software-

based products employ specialised software on a personal computer,typically allowing electronic value to be transferred via telecommunicationsnetworks, such as the Internet.

Hardware-based products have the potential to be used not only for face-to-face payments, but also for payments via telecommunications networks, forexample by means of a card-reading machine and a personal computer

connected to the Internet. Whenever electronic money is transferred viatelecommunications networks, the term network money is used,regardless of whether the electronic money is hardware-based or software-

based.

In addition, the following characteristics of electronic money should beemphasised. First, at the present juncture, electronic money received by the

beneficiary cannot, in most cases, be used again, but has to be forwarded tothe issuer for redemption (closed circulation of electronic money). Withopen circulation, electronic money functions in much the same way as

banknotes and coins, which allow for a number of transactions to be carriedout without the involvement of the issuer.

Second, electronic money can provide varying degrees of anonymity, fromtotal anonymity to full disclosure of the identity of the user, depending onthe technical features of the individual scheme. By contrast, with access

products such as debit cards, the processing of payments requires the


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identification of both parties to the transaction, since their bank accountsneed to be debited and credited.

The Electronic money are represented by many forms5, such as:

1. Debit cards by using these, the consumer is empowered to buymerchandise through effecting an electronic transfer of funds from their

personal accounts from the bank in the merchants account.

2. Stored-value card they are cards similar to the debit and creditcards, but they distinguish by the fact that they contain a fix amount ofdigital cash. A sophisticated stored-value card is represented by thesmart card.

3. Electronic cash represents an example from the real world of theelectronic systems of payment, using e-mail or Web. E-cash is used onthe Internet for buying products and services. A consumer can obtain e-cash by opening a bank account at a bank connected to the Internet.Then, e-cash is transferred to his computer. When a client wishes to

buy a merchandise with e-cash, then he navigates on the net, looks for ashop and selects the option of buying a named article, after which e-cashis transferred automatically from the clients computer into merchantscomputer.

4. Electronic cheque these permit the users of the Internet to pay thebills directly through Internet without transmitting the check paper. Theuser of the computer writes the equivalent value of the check, afterwhich he transmits the electronic check to the other party, which, in itsturn, transmits it to his bank.

Advantages6 of Internet Banking Services -analysed from banks and alsofrom clients perspective are:

5 Source: Net Report magazine, February, 2001

6According to Piaa Financiar, September, 2000


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BANK

good image on the market;

reduced costs of transactions;

rapid answer to the market demands;

increase of revenues; increase in the clients number.

INDIVIDUALCLIENT

reduced costs for the access and use of differentproducts;

ease;

rapidity;

funds administration;

INSTITUTIONA

L CLIENT

reduced costs for accessing and use of products;

liquidity administration.

5.2.1 Development of electronic money in the Euro area; electronic money

oversight, supervision and the community regulatory framework

The role of electronic money in the economy derives from its function as aretail payment instrument. In this regard, electronic money is analogous to

banknotes and coins, cheques, bank transfers or credit and debit cards. Eachof the existing retail payment instruments offers certain specific services

which make that payment instrument particularly attractive to certaincustomers or for certain types of transactions. Nonetheless, there is scopefor competition between them. For example, following their introduction,credit and debit cards competed with cheques. Apart from the range ofservices offered by retail payment systems, the key factor in determiningcompetitive outcomes is the cost associated with the use of each retail

payment instrument. For banknotes and coins, as well as for cheques,handling costs are sizeable. For credit and debit cards, the main costs arisefrom the bookkeeping in relation to bank accounts, including the

verification of accounts and transfers between accounts.With electronic money, transaction costs can be lower than with banknotesand coins. For example, when payments at vending machines are made withelectronic money, there is no need for the merchant to handle banknotes andcoins stored in the machine and to spend resources on the physical safety ofthe vending machine. Furthermore, with electronic money, transaction costsmay also be lower than with debit cards, because the settlement process


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generally requires fewer data exchanges and there is usually no need for anyonline authorisation of electronic money transactions.

The development of electronic money will depend on the decisions made by

customers and merchants as to whether or not to use electronic money as apayment instrument.

From the point of view of the merchant, it is useful to distinguish betweenthe fixed costs and the marginal costs of using payment instruments at a

particular point of sale. In the case of electronic money, fixed costs includethe costs associated with the purchase and maintenance of electronic moneycards and software or dedicated merchant terminals. By contrast, themarginal costs are those relating to the processing of a single transaction,including in particular the costs incurred for telecommunications. To the

extent that electronic money systems need to rely on new technologies ornew standards, which may remain relatively expensive in the early stages oftheir development, fixed costs are likely to be relatively high, at least duringan initial phase. However, the marginal costs of using electronic money may

be lower than those of using alternative payment instruments.

Electronic money and monetary policy

The impact of electronic money on the monetary policy has been a widely

debated issue since the developments in technology made the widespreaduse of electronic money a feasible scenario. The primary objective of themonetary policy is to maintain price stability. With regard to this objective,the development of electronic money raises three different issues:

First, there is need to safeguard the role of money as the unit of accountfor economic transactions. Society reaps substantial benefits from usinga single well-defined and stable unit of account, for conductingtransactions, irrespective of the issuer or the form in which money isissued.

Second, the effectiveness of monetary policy instruments might beaffected by a widespread adoption of electronic money. This relatesmainly to effects on central bank balance sheets and the ability of central

banks to steer short-term interest rates.


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Third, the emergence of electronic money might have repercussions onthe information content of monetary indicator variables with regard tothe primary objective of price stability.

The Eurosystems policy on electronic money

The Eurosystems policy on electronic money is explained in the ECBs7

Report on electronic money (August 1998) and further elaborated in theofficial opinion of the ECB on draft Community legislation on electronicmoney8. On the basis of monetary policy, payment systems policy andsupervisory concerns, the report sets out seven minimum requirements forelectronic money schemes to fulfil, as well as two desirable objectives.

The requirements are as follows:

(i) issuers of electronic money must be subject to prudential supervision;

(ii) electronic money schemes must have solid and transparent legalarrangements;

(iii) electronic money schemes must maintain adequate technical,organisational and procedural safeguard to prevent, contain and detectthreats to the security of the scheme, particularly the threat ofcounterfeits;

(iv)

protection against criminal abuse must be taken into account whendesigning and implementing electronic money schemes;

(v) electronic money schemes must supply the central bank with whateverinformation may be required for the purpose of monetary policy;

(vi) issuers of electronic money must be legally obliged to redeem it at parvalue;

(vii) the possibility must exist for the ECB to impose reserve requirementson all issuers of electronic money.

The desirable objectives, which relate mainly to the smooth functioning ofpayment system, the prudential supervision of credit institutions and thestability of the financial system, are:

i) the interaction of electronic money schemes;

7European Central Bank8ECB Monthly Bulletin November 2000


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ii) the adoption of adequate guarantee, insurance or loss-sharingschemes.

Hence a framework is needed to ensure that electronic money schemes are

safe and efficient and that electronic money issuers are sound.

The new regulatory framework for electronic money institutions (ELMIs) isdefined in two recently adopted Directives: European Parliament andCouncil Directive 2000/46/EC on the taking-up, pursuit of and prudentialsupervision of the business of electronic money institutions and EuropeanParliament and Council Directive 2000/28/EC amending Directive2000/12/EC relating to the taking-up and pursuit of the business of creditinstitutions.

According to European Parliament and Council Directive 2000/46/EC onthe taking-up, pursuit of and prudential supervision of the business ofelectronic money institutions, the main elements of the new regulatoryframework for ELMIs include the following:

i) the limitation of activities article 1 limits the business activities ofELMIs to the issuance of electronic money, the provision of closelyrelated financial and non-financial services and the issuance andadministration of other means of payment, but excluding the grantingof any form of credit.

ii) the scope of application of banking Directives Article 2 stipulatesthat only two EU Directives, if not otherwise expressly provided for,will apply to ELMIs, namely a number of provisions of Directive2000/12/EC and Directive 91/308/EEC on money laundering.

iii) Redeemability- Article 3 stipulates that the bearer of electronic moneymay, during the period of validity, ask the issuer to redeem it at parvalue in coins and banknotes or by a transfer to an account free ofcharges other than those strictly necessary to carry out that operation.

iv)

Initial capital and ongoing own funds requirements - theinitial capitaland minimum ongoing capital requirements for ELMIs is Euro1,000,000, while capital requirements are also set on an ongoing basis.

v) The limitation of investments Article 5 requires that ELMIs invest anamount not less than their outstanding financial liabilities related toelectronic money in highly liquid assets which attract a 0% or, subject


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to quantitative limitations, a 20% credit risk weighting. Limitationsalso apply to ELMIs activities in derivatives etc.

The legal and regulatory regime for electronic money in place in the

countries of the European Union (EU) has, until recently been characterisedby a low degree of harmonisation. The recently adopted Communitylegislation on electronic money provides a comprehensive and harmonisedregulatory framework for electronic money schemes.

The framework limits the issuance of electronic money to traditional creditinstitutions and to a new type of credit institution known as an electronicmoney institution (ELMI). ELMIs are institutions, which specialise in theelectronic money business. The particular nature of their activity and of the

risks that they incur has led to the definition of a specific supervisoryframework. In addition, the application of provisions of the Directiverelating to the taking-up and pursuit of the business of credit institutionswill allow ELMIs to benefit from an European passport, which will enablethem to carry out their activities throughout the EU.

As a conclusion, it should be mentioned that electronic money has thepotential to become an important element of the Euro area financial system.The development of electronic money in the Euro area will be determined

by market forces and reflect competition between electronic money and

existing retail payment instruments, as well as among the various issuers ofelectronic money. As a result, it is difficult to predict whether electronicmoney will develop in the future, and what form its development will take.

5.2.2 Services of E-Banking in Romania

Bank Austria Credit Anstalt launched on-line banking in March 2001.

Bank Austria Creditanstalt Romania (BA/CA Romania) recently launched

Internet Banking, named ON-LINE BANKING, through which thecustomer saves time and money, and does not have to support the costscorresponding to this system.

Offering some modern and secure solutions, of high quality coming andreceiving the client, will be the success of BA/CA Romania.


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The Commercial Bank Ion Tiriac introduced Office2Office electronic

banking

Sine March 1st, 2001, electronic banking service Office2Ofice has beenintroduced. It addresses to physical persons mainly and permits a direct link

with the bank through a computer. The new electronic payment systemworks under Windows and permits the client to manage directly from hisoffice the bank accounts. Data can be viewed and printed or imported to his

bookkeeping system. Using his own computer the client can make paymentsin Romania and abroad and has access to current account informationrelated to effected transactions, initial sold, final sold, and Treasuryinformation. The system is working off-line, this allowing the client to makea verification of data before the transmission to the bank. The access can bedone based on a user name and unique password, having the possibility ofdefining on profiles of different types of users. The system also permits

choosing a set of authorised signatures corresponding to internal policy ofthe company and also the approval of different schemes, depending on the

payment nature.

Citibank Announced the Launching of an Internet-Only Banking

Operation

Demirbank Romania is offering Mobile and Internet Banking Services.

DemirBank Romania has been offering since March 2001 M-banking.

Introducing Mobile Banking service (based on WAP technology) representsa new stage in the development of the bank s offer of products and serviceson the market. A year ago, the bank launched Electronic Banking serviceson the market and after that Internet Banking. Mobile banking represents theusers possibility to access his account from where ever he is, with the helpof his own mobile phone. The computer is no longer necessary. The bankdoes not have additional fees and commissions for the Mobile-Bankingservices, permitting its customers to access their own accounts through themobile phone system.

Alpha Bank

Alpha Web Banking was introduced in 1998; it permits clients to effect on-line elementary banking transactions. In October 2000, share transactionwas introduced. Alpha Bank was one of the first banks that introducedmobile banking through WAP technology. Alpha Bank was in Romania thefirst bank that implemented on-line connection, and executed operations inreal time, it also implemented a multibranch/ multicurrency accounting type.


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Alphaline is a very modern, accessible and secure home-banking service,one of the firsts in its product type. The bank intends to introduce in the nearfuture the Internet banking.

The Romanian Commercial Bankis Launching Home-BankingThe Romanian Commercial Bank is offering to its clients new facilities ofe-type. The bank is offering on the market two products: multicast-BCR,addressed to big customers of corporation type and e_BCR, addressed tosmall and medium size customers. This new system will function bycreating an interface with the customer. The connection with the bank will

be done through the bank s Internet site, with the help of a local browser.

Piraeus Bank

In March 2001, Piraeus Bank launched EXPRESSBank services package.

This comprises four remote banking services: TeleBank, MobilBank,InfoBank, and DirectBank.

The Commercial Bank of Greece

Starting December 2000, the Commercial Bank of Greece offers Internetbanking services, which permit the clients the access to banks products andservices without being necessary the physical presence in the offices.

5.3 The legal framework in the e-services field

5.3.1 The EU s on-line Financial Services legal framework

The European Commission launched a new plan of on-line financialservices development, having at its basis the so-called origin country

principle9, a principle that governs cross border commercial relationships,

applicable to buying and selling financial services. According to an InternalMarket Department official, the plan should become operative till 2005. Onthe other hand, another department of the Commission, the one that isfocussing on the legal field and internal affairs is working at a new law

whose provisions are in contradiction with the unique market requirements.This is stating that the law of the client or consumer s country should applyin other words the destination country principle.

The Commissions representatives in the legal field already adopted a lawnamed Bruxelles1; recognising the destination country principle. Rome

9Source: Piaa Financiar magazine, September, 2000


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Document2, which will be soon proposed to Commission memberspolitical approval takes, also, into account the same principle.

The lack in the consumers trust is the main thing that stops e-commerce

development, a juridical problem spokesperson from the commission,declared.

The economists in charge of the unique market regulation elaboration arestrongly affirming that consumers interests are better served if encouragedcompetition exists.

The existing statutes based on the destination country principal includeBroadcasting Directive, Electronic Signature Directive, technical standardsDirective and Copyright for Satellite and Cable Transmission Directive.

The E-Commerce Directive adopted at the EU level must be transposed intonational legislation by the 15 Member States and revised according toBrussels and Rome.

The EU, in order to regulate and uniform the controversial field of theelectronic signature, recently published a series of directives to beimplemented, for the Member States. Two important objectives are outlined:firstly, it is provided the fact that from the time of the directive entering intoforce, in the EU states; the electronic signature10, has the same value as the

written signature, starting from the premise that the electronic signature,will be able to be certified by a institution specialised in this field. Secondly,there is the archivation of those documents problem. The question: for howlong the signatures must remain in the computer s memory? represents animportant aspect of the problem.

The legal provisions will be uniformly submitted to obeisance and thisaspect constitutes an important phase in the dematerialization of the

payment system.

About on-line, off-line non-discrimination principle, applicable tocommercial operations, the solution was to keep the existing implementedlegislation regarding the operation system using printed documents, and toextend it to on-line operations, to the biggest possible extent, exceptions

10Source: www.europa.eu.int.


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being constituted by the particular regulations applicable to specifiedsituations.

Another important aspect is the jurisdiction problem. In the present, there isno jurisprudence unanimously accepted, and there are situations in which

the two systems are in contradiction. In such cases, beyond the risksassumed by the providers, there also intervene a series of complicated andtime- consuming procedures. The advice that can be given in theseconditions is to be attentive, and prudent in the operations performed andassume for that moment, due to the existent situation, a minimum possiblerisk.

5.3.2 The E regulating provisions in Romania

In Romania, the trust in e sector activities could come only from law. It isnecessary that laws regarding e world be concluded and adopted by theRomanian Parliament.

The Law Regarding the Electronic Authentication

The main actors of e market can be, for the moment, public institutionsand physical persons. The law of electronic authentication is necessary, andit should oblige the public institutions to enter the game.

A good legislation in this field should focus on the participants to theeconomic game protection, and non-intervention as long as the participantshave nothing to reproach one to the other.

The Law Regarding the Electronic Signature11

The electronic signature12

represents an information attached to anelectronic document which:- uniquely identifies the signer, being realised with means placed at users

disposal;

-

it identifies the document,- and signals any afterward modification brought to it.

11 The author of the project of law regarding the electronic signature is Varujan V.Pambuccian, the president of the IT Commission from the Romanian Parliament.

12 Source: www.pambuccian.ro/RlegSign.htm


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It is much stronger than the hand written form one (and given this reason itcan have its juridical regime). It is clear that the law on the electronicsignature is at the basis of any regulation referring to an electronic dataneeding juridical regime.

The regulating institution should be a recently created one, namely, theInformation and Communication National Agency, having the role ofregulating the certification and e-commerce service providers. The Agencyis under the control of the Romanian Government.

The project of regarding e-commerce

The project of law13 regarding the e-commerce states the juridical aspectsrelated to business to business operations (with the typical application:

virtual factory) and to those of business to customer type.

The law form proposed by the Romanian Information CommunicationNational Agency collects all the common regulations from the existentlegislation. The challenged questions are those related to taxes that could be

perceived on e-commerce.

The only way in which these activities can be taxed is the one proposed bythe law project, would be the establishment of an Internet Police

Department having the duty of monitoring every transaction in the network.

For the on-line documents transacted the aspects related to the hour and theplace of the signing of the document and the ways of proving that theaddressed really got the document, these, together with the electronicsignature.

The law defines the electronic exchange of data as a data electronic transferfrom one system to another using a stated standard for information structure.In the sense of the same law, the informational system is a system used forgenerating, transmitting, receiving, stocking or any other similar processing.

The information used under the form of an electronic message, is consideredvalid of producing juridical effects, regarding the conditions provided bylaw.

13Source: www.pambuccian.ro/ R-LegEcom.htm


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The agency must elaborate regulations regarding electronic data exchangesecurity in order to protect electronic commerce operations it also realisesreports on multilateral recognition with organism from other states.

The law of non-cash digital payments systems14

An economys state of health depends also on the speed at which economiccycles close up, and, in Romania it appears that the fluidity of the economiccycles is one of the major problems of the economic decline. So, the non-cash digital operations must be initialised on a large scale, together with thelegislative framework.

5.4 The risk management for e-banking activities and e-money

When speaking about e banking we refer to on-line delivery of bankingservices. The Internet is the main medium of distribution for the on-lineservices, therefore the services offered are mainly subject to the risks relatedto the Internet, without forgetting the traditional risks related to the bankingactivity.

On-line security must be a fundamental component for any E-Banking

strategy. During the time when managers create networks opened to new

applications and to many users, the network is exposed to bigger risks. Thecomplex networks nowadays are frequently vulnerable to different types of

attacks like information steal, denial-of-service attacks, and unauthorised

breakthroughs.

Risk establishment is a continuous process, which supposes the realisationof the following three stages:

- the bank engages in a process of risk identification and where it ispossible, of measurement. When risks can not be measured, themanagement establishes the potential risks that might appear, the steps to

be taken and establishes the impact that these can have on the bank.

- Risk establishment means for a bank determining the bank s risktolerance, thing that implies losses establishment that bank permits in thecase of some unforeseen events.

14According to Piaa Financiar, July,2000


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- The management can compare risk tolerance with the magnitudeestablished for a certain risk, for establishing if the respective risk entersin the tolerance limits.

Risk Control and Administration

After establishing the risks and tolerances, the management must administer

and control them. This stage of risk administration includes such activities

as: internal communication co-ordination, supplementing protection

measurements against external risks, clients instruction as to services use,

a.s.o. Banks increase the ability in the inherent risk control and

administration in any activity when all these are established through

procedures and they are accessible to the whole staff. The risk management

and control process include:

- Security measures and policies. Security represents a combination ofsystems; practical applications and internal control used for putting in asafe place the integrity, authentication, data confidentiality and operating

proceeds. The security policy states the intentions of the firmsmanagement of sustaining the information security regarding the banksecurity planning. The policy shapes the responsibilities for modelling,implementing and strengthening information security measuresstrengthen: it can also establish the procedures for the banks results

evaluation, for the of disciplinary measures and for security violationreporting. The security measures include encrypt, password protection,viruses scan.

- Internal communication. The supreme management must inform the keypersonnel the way in which e-banking and e-money system provisionsintend to sustain the general objectives of the bank. In the same time, thetechnical personnel must clearly inform the management about the wayin which the systems are projected to function, which are the fort andweak points of the system. For assuring an adequate internalcommunication, all the procedures must be previewed in writing. In thescope of operational risk limitation, the management must adopt acommon policy of continuing teaching the personnel the newtechnologies.

- Products and services evaluationbefore they are introduced on a largescale can limit the operational and reputation risks. Testing validates thefact that equipment and systems function and produce the desired results.


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Pilot programs or prototypes can be also of help to the development ofnew informational applications.

Having as objective the enumerated risks reduction, the regulation of all e

activities, the establishment of an adequate infrastructure are necessarythings to be done, as well as providing those entitled to authorise andsupervise these activities.

As any other commercial operation, electronic commerce needs a specificinfrastructure. In this case, this comprises three elements: technicalinfrastructure, the interface with the classical commercial components andthe specific juridical regime.

The technical infrastructure is constituted of hardware systems, the

corresponding software and communication network. This constitutes infact, the component, which determined the apparition and development ofelectronic commerce. It is necessary, also, a major interface with theclassical systems of commerce. The bank represents the key element,

because any commercial operation is possible with the use of money. Abank s insertion in the electronic banking system supposes a securitizedconnection between the bank and the user through which to be able to effectoperations in real time.

5.4.1 Risk identification and risks analysis

Thanks to the rapid changes interfered in the information technology; banksconfront risks specific to e-banking activities and e-money, risks presentedin the annexes. At this level, it appears that the operational risk, thereputation risk, and the juridical risk represent the most important categoriesof risks, especially for the international banks.

Operational risk appears from a potential loss due to somesignificant deficiencies in the integrity and viability of the system. Security

issues are supreme, if banks are subjects to external or internal attackagainst their products and systems. Operational risk can appear as aconsequence of the incorrect use of e money or e-banking systems, as wellas of the inadequate realisation and implementation of those systems.

Security risk. The access control to the banks systems becamemore and more complex because of the developed capacities of thecomputer, geographic dispersion of access points and use of various


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communication ways including public networks like the Internet. Theunauthorised access to the network could lead to direct losses, adding someduties to clients, a.s.o. here could, also, appear a variety of authentication

problems and specific access. For example, the inadequate controls could

lead to successful attacks of hackers operating on the Internet, which couldaccess, save and use confidential information about clients. If an adequatecontrol lacks, a pier could have access to the information system of the bankand could virus it. Close to the external attacks against the electronic

banking and money systems, banks are exposed to the operational riskconcerning the employees fraud. The employees could get, in a clandestineway; data related to the authentication with a view to access the clientsaccounts or steal the stored value cards. The errors due to employees couldalso, compromise banks systems. Of an increased importance for thesupervising authorities is the risk of e-money counterfeits, activity, which,

according to the Criminal Code represents an offence. This risk can beincreased if banks fail to incorporate adequate measures for discovery and

prevention of counterfeits. A bank confronting operational risk fromforgeries and becoming liable for the sum of the forged e-money account.There can also appear costs due to repairmen of a compromised system.

Risks related to the projection, implementation and maintenanceof systems. Thus, a bank is exposed to the risk of an interruption orslowness of its systems functioning if the e-bank or e-money chosen by the

bank is not compatible to the user s requirements.

Risk which appear due to unproper use by clients of bankingproducts and services. The risk is increased when a bank does not instruct ina corresponding manner its clients in what it concerns the security

precautions. More than that, the lack of proper transactions verification,clients could reject transactions already authorised, this way creatingnumerous financial losses. Clients that use personal information(authentication information, number of credit cards, a.s.o.) in an unsecuredelectronic transmission can permit evil intentioned persons to obtain accessto clients accounts. Following this, the bank can suffer financial lossescaused by unauthorised transactions. Money laundry can be another sourceof worry.

Reputation risk is the risk caused by significant negative publicopinion, which consists of a critical loss of funds or bank s clients.Reputation risk can appear when bank s actions produce a major loss of


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people s trust in the bank s ability to fulfil its critical functions in order tocontinue its activity. Reputation risk is important not only for a single bank,

but also for the entire banking system.

Legal riskappears by violation or non-observance of laws, rules,regulations or prescribed practices, or when the legal rights and obligationsof the participating parties to a transaction are not correctly established.Banks engaged in e banking and e-money activities can confront juridicalrisks referring to the release of information regarding clients and protectionof banking secrecy.

Other risks. Traditional banking risks like credit risk, liquidityrisk, interest rate risk and market risk are risks that can appear also in theelectronic banking activity. Credit riskrepresents the risk that appears due

to a partial payment of a credit obligation, at the established term or in anyother established moment after that. Banks that perform e-banking activitiescan extend credit by untraditional channels and extend their market beyondtraditional geographical boundaries. Inadequate procedures, by whichdebtors credibility asking credit through electronic channels is determined,can influence credit risks for the respective banks. Liquidity riskrepresentsthe risk that appears due to banks incapacity to fulfil its obligations atmaturity term. Interest rates risk refers to the bank financial situationexposure to undesired movements of interest rates.Market riskis the risk of

registered losses in the positions from inside the balance sheet, as well as inthose from outside, losses that appear due to price movements on themarket, including the exchange rates.

Examples of risks:

Credit Risk

Lack of payment of the debtors that have solicited credits through electronicchannels.Lack of payment from e-money issuers.

Liquidity Risk

Payment incapacity of an e-money issuer

Interest Rate Risk

Sudden changes of the interest rates of the instruments in which an e-moneyissuer invests


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Market Risk

Foreign Exchange risks coming from the acceptance of foreign coins as apayment for e-money.

Country Risk

Transfer risk coming from a Foreign Service provider or foreign participantsto an electronic banking project.

Management risk.A process of risks administration that includesthe three basic elements of risk: evaluation, exposure control risk andmonitoring the risks will help banks and supervisors to fulfil theseobjectives. It is essential that banks have a transparent risk administration.And when there are identified new risks in these activities, the Board of

Administration and the executive management must be informed.

As a conclusion, it should be stipulated the following:

Traditional financial service providers must exploit the business solutions

based on the Internet, otherwise running the risk of being taken out of the

market.

In the financial sector rapid changes are happening, and institutions do nothave the opportunity to offer the best services in each category. Pioneershave the potential to invent and bring on the market new products that thecustomers find attractive. For this reason, the banks, being unable to rapidlyadapt the changes, will have to become product distributors or producers ofsome of them. In both cases, Internet will be delegated to performunimportant functions for the financial institution.

Virtual distribution (on the Internet) has the advantage of lower costs, on thedecreasing costs of electronic data processing and communication expenses.

Banks, insurance societies, and real estate societies will have to work withthe specialised producers of a certain service type and effect cross selling.Furthermore, there are new opportunities of establishing closer relationshipswith the clients, beyond the traditional boundaries.


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For successfully maximising, the bank of the future will have to develop theessential competencies related to distribution or product specialisation. Aninstitution can not be successful in both directions. A core competence isessential when directly affecting the competitive advantage of that particular

institution in a market field. Core competitive advantages goal is to create abigger differentiation and assign the best resources for it.

E-Business and, in the first place e-commerce became a well-known andgenerally accepted phenomenon. The evolution from a few innovative firms(especially from B2C type of commerce) to commerce on a large scale (ofB2B type) was rapid. The motivation would be the accelerated transactions,reduced costs and an interaction with the client through personalisedsolutions. E-business is no longer a tendency, it is an important changesgenerator in the value added.

Vital to this field is the field of electronic banking, which is vital for on-linetransactions.

Ian Greenspan, president of Federal Reserve Board, a key decision maker inthe economic policies establishment, states

15that the prolonged economic

increase and recession stop in the United States of America have at theirbasis the increase in productivity due to information technology and e-business. The phenomenon became global and had implications in the

entire world.

It is said that the necessary step for entering the 3rdmillennium should beon-line banking

16for all the transactions effected in Romania. The new

payment way could revitalise the existent payment mechanism.

The financial services will be on-line or will not be at all. This is theopinion of the most important players in the financial service field. InRomania, the Internet represents one of the solutions for making thefinancial services field more competitive.

The traditional solutions will not be able to satisfy the modern clientsdemands. No matter how many working points will be opened, the clientwill always be at a certain distance from that; no matter for how many hoursthe offices will be opened, the client will always work later than the closing

15 Source: E-Finance supplement of Piaa Financiar, February, 200116 Source: Piaa Financiar, December, 2000


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hour. It is sure that a service to which a client can have access 24 hours outof 24 a day, will be closer to the clients wishes. From the banks point ofview many branches opened represent high costs with the buildings,employees salaries. On the other hand, E-Banking implies investing in

technology, applications that will provide the support for the developmentof such activities, assuring the security of transactions, well functioning.

A short overview of the requirements and advantages will include:

In Romania, the analysis of the financial-banking market lead to thefollowing statements:

the technological endowment is old and isolated;

the economic climate needs a serious investment;

the legislative context continues to be rigid, but steps have beenmade the projects of law regarding the e domain are waiting forthe approval of the Romanian Parliament;

major banks offering e-banking services proved to be successfully inRomania.

For the establishment of electronic banking service platforms, the basicrequests are:

the rapid access, a simple connection to a variety of channels,respecting the security business rules;

assure secure and rapid transactions;

the programming of the electronic applications must be simple; to contain efficient administration utility programs;

Clients Benefits:

mobility;

comfort and cost savings;

24 hours per day, every day accessibility;

security that meets the very highest European standards;

people can focus their attention on achieving their every day

objectives; time saved;

account management.In Romania, the electronic payments could be a factor of revitalisation ofthe monetary field. But there are still many things to be done.


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Although the electronic payments are more efficient and cheaper than apaper- based payment system, there are certain facts related to theenvironment that are not favourable to the passing to the digital economy:

It appears that, even if steps have been made in order to gradually

adopt the electronic system, even if e-business continues to develop inRomania and the IT market is increasing, Romania in not entirelyready to accept the new era of digital economy; this is due to the fiscalevasion manifested on the market, to the economic agents that are notacting disciplinary, to the existence of a financial blockage, on onehand. On the other hand, our monetary unit is not convertible and thelegislation is restrictive in the sense that it imposes a partial foreignexchange control of the capital transactions, with implications overthe Romanian balance of payments.

In Romania, the infrastructure is not corresponding for thedevelopment of e-business; the legislative framework has many gaps.Recently, the Law of electronic signature was promulgated and thisrepresents a clear step toward e era of digital transactions; other

projects of law with the aim of regulating the electronic domain are ina project phase: the law of e-commerce, the law regarding the

payment effecting through Internet, the law on the software parks, thelaws regarding e-banking and e-finance, the regulations regarding theencryption.

The electronic payments are still in an incipient phase; in order for anefficient electronic payment to be made, institutions like the NationalBank of Romania and other public institutions adopt electronicsystems, offer in-time and modern services. The clearing systemshould be automatically be designed and effected.

The Romanian system, as a whole, is reticent to changes.

The electronic system does not benefit of trust.

In Romania there is no encouragement from authorities to use theelectronic system, there is no project sustaining the electronic system.

Romanians mentality, the conservatory regime is present also in thefield of electronic transactions.

5.5 Advantages and disadvantages of Internet banking

Cynics would say banking is being driven towards the Internet by fear andgreed: fear because everyone is afraid of being left behind and greed


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because there is such potential to save money. While there is an element oftruth in this view, it is too glib an explanation of the real drivers and

potential of using the Internet in banking. If used to its full potential,investment banking across the Internet in conjunction with the related

technologies of intranets and GroupWare could radically change the waybusiness is conducted to everyone's benefit and could do much todemocratise the finance sector. Banking could be more easily available toindividuals and smaller companies as well as making information accessiblein countries whose infrastructure is yet underdeveloped.

A survey published by management consultancy Booz-Allen & Hamilton inAugust 1996[1] supports these arguments. It found that Internet personal

banking costs run at 15-20 per cent of income compared with the averagecost-to-income ratio of 60 per cent. Furthermore, starting an Internet-based

bank could cost as little as US$ one million because all the necessarysoftware is already available. When compared with the US$ 1.5-2 millionrequired to set up a single traditional branch and the US$ 350,000-500,000

per year to operate it, Internet banking clearly represents an extremely cost-effective alternative to traditional branch banking networks. Needless tosay, Internet-based financial organisations could well afford to charge theircustomers much less for the services they offer.

Investment banks are also investigating the opportunities offered by theInternet. More than 70 of the world's top 100 banks already have a presenceon the Web, with the overall number of sites increasing at 90 per cent ayear. By March 1997, there were over 1400 financial servers deliveringinformation on the Web. Although the majority of such sites are currentlylittle more than electronic brochures about the banks' services, the race is onto offer real services from Websites.

"There is no doubt that the Internet will become a fully fledged delivery

channel in a very short period of time," said Michael Berger, a member

of the Booz-Allen & Hamilton financial services team. "Ultimately, all

banks will have a Web presence and most would have advanced Websites capable of conducting most traditional banking transactions

within three years." Internet banking: What is it?

Online systems allow customers to plug into a host of banking services froma personal computer by connecting with the bank's computers overtelephone wires. The convenience can be compelling. Not only is traveltime reduced, but also ATM machines; telephones banking or banking bymail is often unnecessary. And, technology continues to make online


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banking, once attempted only by computer enthusiasts, easier for theaverage consumer.

Even that may not be easy enough, though. Many systems that offer greaterfinancial control also require more work. Online bill payment is an example

of an effort that requires setting up which leads to ultimate convenience.

Banks use a variety of names for online banking services, such as PCbanking, home banking, electronic banking or Internet banking.

Internet Banking: Many advantages

Regardless of the name, these systems offer certain advantages overtraditional banking methods.

Consumers can use their computers and a telephone modem to dial infrom home or any site where they have access to a computer.

The services are available seven days a week, 24 hours a day.

Transactions are executed and confirmed quickly, although not

instantaneously. Processing time is comparable to that of an ATM

transaction.

And the range of transactions available is fairly broad. Customers can

do everything from simply checking on an account balance to

applying for a mortgage.

Internet Banking: There are disadvantages

There are also disadvantages.

The most obvious: Technophobes need not apply. You must be

comfortable using a computer.

Investment of time upfront can be formidable. The data entry is

necessary before the numbers can be massaged and money managedsuccessfully. Online bill payment is an example of an effort that

requires setting up which leads to ultimate convenience.

Other advantages of Internet banking are:

Easy 24-hour access to account information and transactions;

Automatic chequebook balancing;


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Current and accurate account balance;

No monthly fee for bill paying or account access;

Electronic transfer of funds between accounts;

Free bank wires;

Immediate accesses to statements and cleared checks.

Future

Many experts agree that Internet Banking will revolutionise the World WideWeb and completely change our perceptions and attitudes of an increasinglydigital society. Others suggest that Internet Banking and electroniccommerce will usher in a new and sinister digital era in which the US

Government will have access to all our PCs. We must, however, rememberour ancestors experience with the introduction of televisions. Many

believed that "Big Brother", otherwise known as the US government, wouldbe watching us through the television we purchased for our homes. Perhapsa more realistic concern is the current state of security. With advances insecure transmission technology, these concerns will be relieved.

Financial institutions will continue to offer PC-based home banking servicesto their customers. Estimates of the number of PC home-banking customers

in 2000 range from the single- to double-digit millions. Microsoft now has58 announced banking partners distributing its Money home-bankingsoftware to customers, while Intuit has racked up 37 bank partners. Dozensof other financial institutions are turning to bank-brandable softwareavailable from a slew of more traditional banking vendors, such as CFIProServices, Online Resources & Communications and CheckFree(Servants), as well as developing proprietary packages.

One thing is guaranteed the growth in US household PC penetration ratesand constant marketing references to the Internet and the World Wide Webhave increased the awareness of the PCs capability to communicate withthe world. As a result, interest in Internet Banking has accelerated.After losing ground to non-banks in credit cards, mutual funds, andmortgages, bankers hold more effective relationship management amongInternet Backings objectives. Financial institutions are hoping that InternetBanking will assist in retention of their most profitable customers whenthose customers relocate.


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An important factor in the growth of Internet Banking is the number ofhouseholds that own personal computers. The number of households thatown personal computers grew by 16% last year, according to a new survey

by Computer Intelligence Infocorp, which interviewed 11,500 PC users.That puts the total percentage at 38.5% of U.S. homes that have one or morePCs. According to a recent Wall Street Journal article, recent buyers tendedto be older and less-affluent Americans. The growth in PC ownershipamong households making $10,000 to $30,000 was up nearly 25%, to arange between 10% and 30% of the total, and about 20% of householdsheaded by people over 60 now contain a PC.

Advantages

The advantages of Internet Banking are numerous for both financialinstitutions and users. For the Financial institutions, the most obviousadvantage is cost. The following table shows the relative costs to the bank

per transaction for the various channels:

Channel - Cost/Transaction

1. Branch Full Service: $ 1.07

2. Telephone Average: $ 0.54

3. ATM-full service: $ 0.27

4. PC banking (3rd party): $ 0.015

5. Internet Banking: $ 0.010

Although other surveys have come up with different figures, there isconsistency in one important sentiment; they all agree there are tremendous

potential cost savings if financial institutions manage to carry out a higherpercentage of their transactions over the Internet.

Another incentive for financial institutions is image. Having been famouslydescribed by Bill Gates as "Dinosaurs", they are now eager to promotethemselves as innovators in order to attract customers and, moreimportantly, to retain existing customers. Mr. Gates also commented "giveme a slice of the transaction industry and the banks are history". While hehas since made his peace with the banks, claiming that the Dinosaurcomment was aimed at their systems rather than at financial institutionsthemselves, he has managed to incite them into action. They need to


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remember that they have no divine right to rule the financial transactionsindustry and can no longer afford to be complacent. Luckily, the U.S.government denied Microsoft the opportunity to acquire Intuit due toantitrust and monopoly restrictions; however, financial institutions should

still continue to take notice, as the spectre of Bill Gates still loomsominously over the financial services industry.

Internet banking isnt just restricted to the countrys largest financialinstitutions. Some of the more regional players, such as credit unions, arealso making their mark. The smaller size of these institutions has allowedthem to out-manoeuvre some of their larger competitors. One effect of thetrend towards Internet banking is to level the playing field so that evensmaller financial institutions can offer the type of sophisticated servicecustomers would normally expect only from a large bank. The increased

competition can benefit both the financial institution and the consumer. Thefinancial institutions will benefit from the drive to utilise the besttechnology available (increased efficiencies, lower incremental transactioncosts). The consumer benefits from greater choices and lower costs. Inaddition, Internet banking can be especially appealing to financialinstitutions whose "members" are not located near branches (again

benefiting both the institution and consumer). In addition to providingexisting customers with access to banking services, Web sites operated byfinancial institutions may also be used to solicit new customers.

For the user, the advantages are more obvious. The ability to pay billselectronically, check balances, transfer money and do other banking tasksfrom the office or a home P.C, saves time and increases efficiency. It alsosimplifies account tracking and record-keeping.

Disadvantages

Security issues have always plagued the Internet. Although the Internet willnever be completely secure, the fact is that current fears are in many waysirrational, fuelled by horror stories rather than fact. Recent advances insecurity technology have lead to "more" secure systems. An example is thedevelopment of SET by Microsoft and Visa. Another example is thedevelopment of CSEPS and CSETS by Clay Pigeon Technologies. Perhapsit is an indication of the power of the message provided by the media thatwe worry about internet security but continue to use other insecure


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transmission media such as the telephone to transfer confidentialinformation.

Socialists also suggest that Internet Banking "dehumanises" banking bytaking away social, human contacts. This argument raises two important

points:

1. Those of us think the idea of a great social event is to stand in linewaiting for a teller need not worry. Internet banking is not, at least forthe moment, intended as a replacement to the traditional brick-and-mortar financial institution, but merely as an additional channel to

provide customer service and efficiency, much like telephone banking,PC banking, and 'real' banks.

2. Internet banking is up and coming. Although it is important to be awareof the security issues, there is nothing to prevent it from dramatically

changing the future of financial transactions.

Financial institutions proposing to provide services through the Internethave to confront a number of legal issues. These include the problems ofauthentication, electronic formation of contracts, and issues related to thecreation and protection of content provided on a financial institutions Website.

Regulators are also taking an interest, as foreign financial institutions areincreasingly able to solicit domestic residents. As well, the potential that

electronic cash will be increasingly adopted as a medium of exchange fortransactions conducted across the Internet is raising concerns that existingforms of regulation may not be adequate.

Pros and cons about Internet banking

Intent banking can provide advantages and disadvantages.

Thepositive factorsare:

Convenience. The services are open 24 hours a day, seven day a week. Billscan be paid with a few keystrokes, so you do not have to write the check,address and stamp envelopes.

Financial planning capability. Internet banking can give you fingertipaccess to all areas of personal money management such as budgeting andforecasting.


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Low cost. Internet banking operate at an expense much lower than a branch.Banks can be able to provide services at lower prices.

The possible negative factorsmay include:

Lack of person-to -person interaction. Since all transactions are executedvia computers, Internet banking is impersonal.

Computer overload. If the system goes down at the same time when youwant to do banking, you may have to fall back on traditional bankingmethods.

Growing pains. Some Internet banking services are coming to marketbefore they are ready. Stories have surfaced about not working PIN numbersor incompatible modems.

Service limits. You can not deposit online and you can not withdraw cashfrom a PC. ("The ABCs of Banking Online", Black Enterprise. 26(8): 45-46.1996 March).

Disadvantages of Internet banking compared to other systems

What are Internet Backings weaknesses compared to other alternativedelivery systems? A discussion of the weaknesses follows:

New developing technology - Internet Banking is the latest form oftechnology for banks. Internet Banking is a developing technologysupporting self-service delivery channel. It is extremely customer drivenand responsive to the customers needs. Developing technologies such asInternet Banking, though, run the risk of getting too far of ahead of the

banks; therefore, the banking industry will not be able to sell to thecustomer. In reverse, the banking industry can get too far ahead oftechnology, and banks will be able to deliver to the customer.Unknown strategy- the dilemma of the "nervous banker" refers to the

banking industrys wait and sees approach. Banks are now struggling toplay catch-up. Banks have missed chances to strengthen customerrelationships by not taking full advantage of the Internets interactivecapabilities. They have viewed the Internet as a means of providing static


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information promoting their products and services. The banking industrysbiggest challenge is in establishing an electronic banking strategy and fullyunderstanding its options and implications. The Internet is a new alternativedelivery channel, which requires new thinking and marketing efforts.

Investment cost - The initial cost investment of Internet Bankingtechnology is higher than the other forms of alternative delivery systems.Due to inexperience, banks that attempted to establish Web home pages runup against major problems. They need to invest in their own server, a highlysophisticated and costly computer to create their Internet presence. The costestimated for a Web site ranges up to $60,000. Unlike the other systems, aWeb site costs an additional several thousand dollars per month inmaintenance costs. The complexity and the cost of creating and maintaininga Web site on the Internet can quickly overwhelm Banks.

Security - Security is perceived as the biggest weakness of the Internet. TheInternet is a security nightmare because of its characteristics: public, open,network of peer to peer networks, flat and mesh topology, connectionlessdatagram routing, no central authority, protocols based on mutual trust, andnave users. The banks rely on the secrecy or authenticity of informationand transactions on the Internet. Banks need to establish an infrastructurethat incorporates both security policies and management staff to supportinformation security.

CONCLUSION

Because the world directions in any field are drowned by the mostdeveloped nation into the world we will report our conclusions to theirstatistics. So, first will examine the Internet services situation generally andafter that we will conclude and about the Internet Banking situation. Allthat, because this segment of market is already prepared to use the InternetBanking solutions.

First: the Electronic Commerce (business-to-consumer) is one of enginesthat are working for the Internet Banking cause. Forrester Researchestimated in 1997 that residents of five million U.S. households hadshopped for some product using the Internet. The number for 1998 was 10million and the forecast for 1999 is that 13 million U.S. households willshop on the Internet. Also IDC estimates the dollar volume of business-to-


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consumer sales at $14.9 billion for 1998. The IDC forecast for 1999 is $31billion. Other IDC predictions are $50.7 billion for 2000, $78 billion for2001, $116.5 billion for 2002, and $177.7 billion for 2003. (See figure

below).

Source: Forrester Research, Inc.

Second: Electronic Commerce: business-to-business17

. International DataCorp. (IDC) estimates that the dollar volume of business-to-businesselectronic commerce in 1998 was $27.4 billion. The projected volume for1999 is $64.8 billion. IDC forecasts $138.8 billion for 2000, $270.9 billionfor 2001, $526.4 billion for 2002, and $978.4 billion for 2003. (See nextfigure)

17- Internet - http://www.usic.org/papers/stateoftheinternet99.htm


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Source: IDC, Inc. (1999)

In Romania the Internet Industry has a great potential and it is continuously

growing. In the year 2001 after a general agreement among all the InternetProviders, there was implemented a Romanian Backbone that will improveconsiderably the quality of the Internet Banking services. The ElectronicSignature Law was adopted by the Romanian Parliament. That low is veryimportant, because it helps the movement of electronic payments ofconfidential data into the Internet with confidentiality and authentication ofsender and receiver (electronic signatures instead of ololgraphic ones).There are a lot of banks in Romania that are already providing such aservices, such as: the Commercial Bank of Greece Romania, Demir Bank(also and with a mobile banking using mobile phones), Bank AustriaCreditanstalt, City Bank Romania, Libra Bank, Banca Unirea, etc. So, weestimate that soon that kind of banking service will have a great future inRomania and all over the world.


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1. What is an e-bank activity?2. What are the techniques of the banking operations performed through

the Videotext System?

3. List the three entities that take part in the Videotext system.

3. What are the functional characteristics of the Videotext system?

4. List some procedures by which it is possible to distribute electronicbanking products and services.

5. What are the main forms of Electronic Money?

6. List the main definitions.7. List the main technological features of electronic money.

8. Define the legal framework in the e-services field.

9. Explain the impact of electronic money on monetary policy.

10. List the seven minimum requirements for electronic money schemes.

11. Show the main types of risk for e-banking activities and e-money.

12. What is the Romanian environment and development of e-bankingservices

13. List the main elements of the new regulatory framework for ELMIs.14. List the main elements of the new regulatory framework for Electronic

Money Institutions.

15. What are the advantages of Internet banking services from the bankpoint of view?

16. What are the advantages of Internet banking services from theindividual client point of view?

17. What are the advantages of Internet banking services from theinstitutional client point of view?

18. List some electronic banking services realised by the Romanianbanks.

19. What is the electronic signature under the provisions of the Romanianlegislation?

20. List the main advantages and disadvantages of Internet banking.

Progress test


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ANNEX No 1

Extract from the European Parliament and European Council

Directive 2000/31, concerning data confidentiality

Directive 2000/31/EC of the European Parliament and of the Council ofJune 2000 on concern legal aspects of information society services, in

particular electronic commerce, in the Internal Market. (Directive onelectronic commerce)/ quotation regarding the confidentiality of data andthe definition of the information societies as stated by the Community Law.

(15) The confidentiality of communications is guaranteed by Article 5Directive 97/66/EC; in accordance with that Directive, Member Statesmust prohibit any kind of interception or surveillance of such

communications by others than the senders and receivers, except whenlegally authorised.

(17) The definition of information society services already exists inCommunity law in Directive 98/34/EC of the European Parliament and ofthe Council of 22 June 1998 laying down a procedure for the provision ofinformation in the field of technical standards and regulations and of ruleson information society services (21) and in Directive 98/84/EC of theEuropean Parliament and of the Council of 20 November 1998 on the legal

protection of services based on, or consisting of, conditional access(22);this definition covers any service normally provided for remuneration, at adistance, by means of electronic equipment for the processing (includingdigital compression) and storage of data, and at the individual request of arecipient of a service; those services referred to in the indicative list inAnnex V to Directive 98/34/EC which do not imply data processing andstorage are not covered by this definition.

(18) Information society services span a wide range of economic activitieswhich take place on-line; these activities can, in particular, consist ofselling goods on-line; activities such as the delivery of goods as such orthe provision of services off-line are not covered; information societyservices are not solely restricted to services giving rise to on-linecontracting but also, in so far as they represent an economic activity,extend to services which are not remunerated by those who receive them,such as those offering on-line information or commercial communications,or those providing tools allowing for search, access and retrieval of data;


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information society services also include services consisting of thetransmission of information via a communication network, in providingaccess to a communication network or in hosting information provided bya recipient of the service; television broadcasting within the meaning of

Directive EEC/89/552 and radio broadcasting are not information societyservices because they are not provided at individual request; by contrast,services which are transmitted point to point, such as video-on-demand orthe provision of commercial communications by electronic mail areinformation society services; the use of electronic mail or equivalentindividual communications for instance by natural persons acting outsidetheir trade, business or profession including their use for the conclusion ofcontracts between such persons is not an information society service; thecontractual relationship between an employee and his empl

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